Warren Buffett's 25-Year Love Affair With Wells Fargo

By Jay JenkinsFool.com

Source: Fortune Live Media via Flickr.

In 1990, Warren Buffett upped his stake in Wells Fargo to 10% ownership of the bank. Since then, the stock has beaten the S&P 500 by 7.8 times.

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Let's celebrate this fantastic investment by revisiting Buffett's initial thesis and looking for lessons we can apply to our own investing.

A bargain for a great companyThe late 1980s and early '90s were characterized by a bit of a panic in the banking industry. Real estate prices were collapsing, and lenders were taking a beating on their balance sheets and in the markets.

Wells Fargo was no exception. The bank gave back nearly 34% of its value between June and October of 1990. CompetitorBank of America fared even worse, losing over 45% during the same tumultuous time.

WFC data by YCharts.

It was at this moment that Buffett pounced, taking full advantage of the panic in the markets.

In Buffett's 1990 letter to shareholders, he described the transaction thusly:

The investment clearly paid off for Berkshire Hathaway shareholders, but I'd argue for a less-than-obvious reason. Wells Fargo's stock has performed remarkably in the intervening 25 years -- that's obvious. But it's also noteworthy that Buffett didn't invest in Bank of America.

Take a look at this chart from Dec. 31, 1989 to the present. It really sums up the amazing judgement and opportunity cost saved by Buffett in buying Wells over B of A.

WFC Total Return Price data by YCharts.

With banks, it's not enough just to "buy low"How did Buffett know that Wells would outperform Bank of America by such a wide margin? Most likely he didn't know for sure, but I'd guess he was pretty confident. The reason is culture and management.

Buffett speaks to this in the same annual letter. He said:

In more recent history, we witnessed a near-identical series of events. In 2007 and 2008, the real estate market imploded. Banks across the board were crushed in the market. In the aftermath of this implosion in 2010, Buffett increased his ownership in Wells Fargo. Once again, Wells management proved to be excellent: The bank suffered far less than competitors, and its stock weathered the storm admirably before rebounding to make Wells the world's largest bank by market cap in 2014.

Buffett only invested money in Bank of America after the bank offered him a nearly risk-free options structure that only an investor with the cachet of Buffett could negotiate.

Foolish takeawayBuffett's approach has remained largely unchanged since 1990. He looks to buy strong companies at good values. He puts a heavy emphasis on management and culture in his analysis, particularly in risky industries like banking.

From there, he lets those strong management teams take care of businesses over the long term. The brilliance of Buffett is his ability to successfully identify those best-of-the-best management teams. How do you do this on your own? For one, you have to think independently. Buffett advises in that same 1990 shareholder letter:

The article Warren Buffett's 25-Year Love Affair With Wells Fargo originally appeared on Fool.com.

Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Bank of America, Berkshire Hathaway, and Wells Fargo. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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